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There is much debate between the complete history of money and its origins. For the relevance of this essay, we will disregard the debate and discuss the history of money and barter only in regards to money economic value and use. Prior to a monetary system, humans are believed to have existed in a barter economy and slowly advanced towards a monetary system. which has existed in many diverse forms ranging from ‘Amber, eggs, feathers, gongs, hoes, ivory, jade, kettles, leather, mats, nails, oxen, pigs, quartz, rice, salt, thimbles, umiacs, vodka, and others. (History of Money, Glynn Davis P27).
As money, has existed in numerous different formats it becomes evident, it’s near impossible to define by its physical characteristics. Instead, we defined money by its function. In economic theory as highlighted in the BoE Summit Paper (Ali et al), something is considered money on its functionality as a medium of exchange, unit of account and lastly store of value. *Although Glyn highlights many more functions of money it is important to note that many other functions are abstract and not necessarily required. We look at the barter economy, its problems and how these 3 functions of money alleviate the inefficiencies and problems of bartering thus giving money value. The barter economy is described as an economy whereby a good one wishes to consume is obtained by directly trading it for the good one has and as such, there is no good used as a medium of exchange (ModellingMonetary Economics, Page 34-35).
Early on civilization when the economy was small and there were fewer goods a barter economy is not a large problem but as the economy grows, and there are more people and more goods to trade, a barter economy can be very inefficient for it requires a double coincidence of wants an exchange to take place. A double coincidence of wants is when for person A and person B to trade both must possess what the other desires, in a large economy with many goods this can prove to be a costly endeavor. Further costs in a barter economy relate to the perishability of a good: e.g. Assume Person A has some corn they wish to exchange for cotton. As a trade, can only occur in the instance of a double coincidence of wants, there may be an instance whereby Person B is acquiring cotton in time = t, so that they can exchange it for corn. It is not unfair to say that this would take some time and so if we assume that Person B acquires cotton in t+1 which they hope to exchange for corn.
However, in t+1 the corn(crop) has perished. Person A has lost out on a trade and Person B who went to acquire cloth only to exchange for corn has lost out, as they are stuck with a good they do not want and must again embark on a search for a double coincidence of wants. Paul Samuelson further delves into the problem of a barter economy and its inefficiencies with the use of the OLG model. Noting that without money, there would be no incentive to trade between generations and so the economy would be in autarky Money solves these issues by acting as a decentralized record keeping system. The OLGmodel shows how the use of money in an economy not only facilitates trade between generations but also raises the welfare of the economy, such that both parties are now better off.
The medium exchange function of money is very valuable in removing the costs of searching fora double coincidence of wants. The Unit of Account function of money allows for real value to be placed not only upon goods but also other services. And allows for goods to be priced more accurately. The importance of this function can be highlighted in an example: where if we assume cows are used as a medium of exchange and somebody wishes to purchase a pair of shoes. A pair of shoes aren’t worth 1 whole cow, but both parties agree it is worth half a cow. In this scenario, no trade can occur, you simply can not give half a cow without killing the cow and thus destroying the value of the cow. Simply put because the cow is not divisible it cannot act as a proper unit of account and so makes trade difficult. And lastlymoneys function as a store of value is of importance too, if money does not have a stable store of value then nobody would be willing to accept it as a medium of exchange, out of fear that it would lose its value and they would be unable to use it. The above example of corn highlights the reason why this function of money is important.
However, as Noah Smith notes it is important to understand that when economists refer to money as a store value, it is within the parameters of being short-run. For if it were a long-run store of value, it would dis-incentivize its use as a medium of exchange. Money is not without flaws, as Bruce Chap highlight. The use of money induces two transactions, from goods to money and money back to goods, whereas a barter economy only requires one, a direct exchange of goods. This can induce what is sometimes referred to as an exchange cost. To assess the extent of an exchange cost we useBruce Chap’s model: Where ?= exchange cost of goods per person, ?m = exchange cost associated with using money & J = number of goods in the economy. If we assume exchange costs to be zero in this model, then in the case where the number of goods is greater than 3 (J>3). Monetary exchange is cheaper than barter and thus a superior mechanism of payment.
However, in reality, it is appropriate to consider there would be exchange costs, especially if commodity money was to be used (i.e. gold coins). An exchange cost in such an example could include the cost of verifying the weight and quality of gold. Thus, in this scenario, the advantage of money (reduces search costs) could be offset by potential exchange costs. Due to these and other issues with commodity money overtime, money was changed and developed to better fit the needs of people. From commodity to commodity backed (gold standard) and later to the monetary system used by all countries today, fiat money. Bitcoin evaluated as money and further into which category of money it is (includes why it would be good money).
Understanding that in economic theory money acts as an instrument which functions as a medium of exchange, a unit of account and store of value. We begin by discussing how well bitcoin fulfills these functions. To be used as a medium of exchange, a large enough number of people must be willing to accept bitcoin in exchange for goods and services. This is because a person will only accept bitcoin if he or she believes others would also be willing to accept it from them. This poses bitcoins first obstacle because it has no intrinsic value and thus for it to be utilized as a medium of exchange it must provide a useful and valuable function to people, that fiat does not. Although it is arguable that fiat to is intrinsically worthless, itis important to note that a government/states backing of fiat currency induce trust. This backing provided by the state enforces fiats trust between all. Bitcoins initial use was largely confined to illicit activities on the dark web, most famously silk road (online marketplace for drugs, weapons etc)and some small e-commerce sites.
Over time more and more retailers have started to accept bitcoin. The earliest large retailer to accept Bitcoin as discussed by both Stephanie & Wang & Yermack was Overstock, an online retailer with sales of $1.8billion in 2016. In 2014 when Overstock began to accept Bitcoin, it accepted $126,000worth of sales in just one day. This lead to an increasing number of other retailers to also begin accepting bitcoin in 2014. Coin base a bitcoin wallet that processes Overstock’sbitcoin transactions; quotes’ it is also serving 19,000 other businesses.
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